Limited community of property

In the Netherlands, the Limited Community of Property Act of 2018 determines which assets are shared in a marriage or registered partnership, and which are not. If you get married or enter into a registered partnership without making any further arrangements, you share only the assets and debts you accrue starting on your wedding or registration day. If you have made arrangements, for instance, a prenuptial agreement, the agreement determines who owns what.

Limited community of property means that you only share the assets and debts you accrue together, starting from your wedding day. It applies if you married or entered into a registered partnership after 1 January 2018 and did not make any arrangements. If you entered into the marriage or partnership prior to 2018 without making arrangements, the old rules apply: you automatically share ownership of all income, property, and debts.

Different sources of capital

In limited community of property, a distinction is made between three asset classes: the personal assets of each spouse and their joint assets. This does complicate things a bit. All income, property, and debts that the spouses accrue while they are married are part of their joint assets and debts. This also applies to assets and debts jointly owned by the spouses before they married. Property and debts that were owned by either of the spouses before they got married remain part of their personal property while married.

In short, the assets and debts accrued through the joint efforts of the spouses belong to both spouses. All other assets and debts remain untouched.

What does the act mean for you as an entrepreneur?

• A business owned by your partner is not covered by the limited community of property if they already owned the business before entering into the marriage or registered partnership.
• The business and its proceeds do fall under the limited community of property if it was started after you entered into the marriage or registered partnership.
• Only those assets and debts accrued while you and your partner are married or have a registered partnership are covered by the limited community of property.
• Equity, gifts, and inheritances acquired both before and during the marriage or registered partnership are private property.
• The undistributed part of the business profit or debt incurred during the marriage or registered partnership (as far as can be considered reasonable) normally falls within the joint property. So, in the event of a divorce, these profits or debts must be shared.

Important considerations for entrepreneurs

The Dutch Civil Code (art. 1:95a Civil Code) contains an article specifically for entrepreneurs. It says that if a spouse owned a business before the marriage, that spouse must pay reasonable compensation for the knowledge, skills and labour to the limited common property. In doing so, you are contributing to the 'household'.

But what is reasonable compensation? That is not clear. The future, practice, and especially jurisprudence will tell. It is currently an open standard that depends on the specific circumstances of each individual situation. Ultimately, the goal is for both parties to have a favourable outcome.

In the event of the death of one of the partners or a divorce, questions may arise as to what belongs to whom. If there is no way to demonstrate ownership of an asset, it is assumed that the asset is part of the common property and must therefore be shared. So, it is important to carefully document who owns what, for example by drawing up a notarial deed. But a mutual (private) deed is also sufficient. Regardless, make sure to keep all receipts.

Valuation

If you are a business owner and are planning to get married or enter into a civil partnership without making any prior arrangements, make sure that your company is properly valued in advance. If you get divorced and it appears that your business has become more valuable, your partner could possibly demand half of the current value of the business, even if you made the required contribution to your shared household. If no clear arrangements are made in advance, issues may arise that could possibly jeopardise the continuity of your business.

If your partner lends money to your business, the value of the business increases significantly as a result, and a divorce follows later, investment law dictates that your partner can make a substantially higher claim. This is because it assumes that as the value increases, so does the share of the partner. And the value increase may outweigh the value of the loan.

Other arrangements

You can make other arrangements to avoid limited community of property. If the situation calls for it, you can choose a prenuptial agreement drawn up by a notary. Or the old system of full community of property. This choice depends on risk planning, future expectations, and income, inheritance, and gift tax.

To avoid confusion and unforeseen problems with regard to the ‘reasonable contribution’ and valuation of a business in the future, it is advisable to make clear arrangements in advance, stating clearly what you want as partners. Make sure to contact a notary or expert in this area to prevent complications in the future.